The Immigration Relief Valve

Happy Monday Morning!

Housing affordability is front and center these days, as it should be. We are currently sitting at the worst levels of housing affordability since the 1980s. If housing doesn’t get fixed, and quickly, the political careers of JT and his liberals are finished.

With the next federal election less than eighteen months away time is running out. Over the last couple of years they’ve introduced the foreign buyer ban and the underutilized housing tax, which, while well intended, hasn’t yielded any improvement in housing affordability. Sliding further in the polls, it’s desperation time. Cheques are being mailed to get shovels in the ground via the housing accelerator fund, and they finally removed GST on new rental housing construction.

And for their last trick, here comes the kitchen sink.

Marc Miller, the immigration minister, has announced the liberal government will set targets for non-permanent residents. The government is looking to shrink temporary residents' share of Canada's population over the next three years.

Miller said temporary residents made up 6.2% of Canada's population in 2023 and the government is working to reduce that share to 5% by 2027. That would mean a decrease in the temporary resident population of roughly 19%.

This is potentially a HUGE deal. Let’s break it down.

The Canadian population has grown by 3.2% over the past year, the highest in 70 years. We’ve added a staggering 1.2 million people in twelve months. This is more than double the pace in 2019 and in the years that preceded it. For comparison, the U.S. population, which stands at nearly ten times the size, is estimated to have grown by a nearly comparable amount. Whoops.

Most of the population growth is via non-permanent residents, accounting for 800,000 of the 1.2M new people. Non-permanent residents (NPR’s) account for 6.2% of the population. According to my good friend Ben Rabidoux of Edge Analytics, if we want to get NPR’s down to 5% of the population by 2027 we will have to see an outright DECLINE of 440,000 non-permanent residents (assuming permanent resident targets remain the same).

In other words, our population growth rate would go from 3.2% (the highest in 70 years) to 0.8% next year, and roughly 0.7% in 2027.

In simple terms, we could see immigration go from 1.2M to 290,000 within a year.

Source: @xelan_gta on X

Who’s prepeared for that?

Keep in mind this could be more political window dressing from the feds. Whether or not they are able to execute this plan remains a big question mark. If they pull it off, the implications are significant.

Economic growth which has been entirely fabricated via population growth will slow. Remember real GDP per capita has been falling for six consecutive quarters! Rent growth, which is currently adding 0.5% to headline inflation will also slow.

Source: PGM Global

This is good news here is this will provide a relief valve for the Bank of Canada who has been fighting an uphill battle with sticky shelter inflation. Shelter inflation should slow further, and rates should come down, perhaps more than expected.

It’s bad news, however, for developers that have a record number of new rental units currently under construction. A material slowdown in population growth will slow rent inflation. We are already seeing rents slow in Toronto and Vancouver.

There have been a lot of assumptions made that rampant population growth would continue unabated, even though it was clearly unsustainable.

If the immigration jaw-dropper announcment wasn’t enough, here’s another from OSFI.

OSFI, the banking regulator will limit loans to borrowers with mortgages greater than 4.5x their annual income starting next year. While each lender will be allowed to provide some loans above the 450% LTI threshold, OSFI will cap the amount banks can have in each quarter. That cap will be based on the number of individual loans and not the amount of outstanding loans.

The share of new mortgages with a LTI ratio over 450% was 12% in the last quarter of 2023, a drop from 26% in the first quarter of 2022 during the borrowing bananza of the pandemic housing bubble.

Source: Bank of Canada

This policy won’t have much impact today, but if/ when rates fall it will limit borrowing capacity further.

Here’s an example from Rob Mclister of Mortgage Logic.

Today, a family making the average income ($140,106 according to the Fraser Institute) with no other debt, 20% down, a 30-year amortization and a 6.99% qualifying rate can afford a $581,000 mortgage at the standard 39% GDS limit. That is only 4.15 times income, so there'd be no impact in this example.

Drop that qualifying rate down to 5.25% (the minimum stress test) and it's a different ballgame. Under current rules, this borrower's approvable mortgage amount would be $678,000. That's 4.84x income, which is above the new limit.

If a lender limited them to 4.5 times their income, the loan amount would drop to around $630,000. That's a $48,000 or 7% haircut compared to the mortgage they can get under today's rules.

Will we see a rush of borrowers trying to beat the tightening, like they did when the stress test was announced? Maybe but I doubt it.

With seemingly every level of government aimed at slowing runaway house prices it seems safe to suggest the era of rampant house price inflation may be in the rearview mirror. Let’s see.